A Middle Class Tax Cut? That Depends on What Happens to the Child Tax Credit

Gary Cohn Deplanes AP PhotoAlex Brandon
AP Photo/Alex Brandon

The Trump administration has frequently said that one of its tax plan’s top goals is to cut taxes for the middle-class. The fate of a tax credit for parents with children at home may determine whether that goal is met.

The best known provisions of the Trump administration’s tax plan reduce the corporate tax rate and cut the current seven income tax brackets down to three. But the administration has also proposed an increase to the child tax credit, although it has not spelled out the details or the size of this change.

Those may be crucial to the ability of Republican leaders to get a tax plan passed on Capitol Hill because the child tax credit will largely determine whether the middle-class sees a tax cut or a tax hike, according to an analysis by Breitbart News. A large increase to the credit would mean a sizable cut in the tax bill of the American middle-class. If not increased, the tax plan would likely raise taxes on many middle-class families.

Under current law, taxpayers can claim a tax credit of up to $1,000 for each child under age 17. The credit is reduced by 5 percent of adjust gross income over $110,000 for married couples. If the credit exceeds the taxes owed, taxpayers can get some of all of it as a refund, known as the refundable child tax credit. It is extremely popular, with some 70 percent of families with children receiving an average of $1,060, according to the Tax Policy Center. And it is even more popular with the American middle class, where about 90 percent of families that earn between $41,000 and $72,000 claiming the credit.

The Trump administration has reportedly worked with the staff of Senator Marco Rubio to increase the child tax credit, although the details remain murky. Early reports said that the Trump administration was pushing to double the tax credit.

The size of any increase to the child tax credit is likely to determine how the tax overhaul impacts the middle class, potentially offsetting some changes that would otherwise increase the tax bill of the middle class. Those potential tax hikes come primarily the form of the elimination of the personal deduction and a rise in the bottom tax bracket from 10 to 12 percent.

Under current law, a married couple with two children earning the median household income for Americans of $55,000 would be eligible to take a $12,700 standard deduction plus an additional $16,200 in personal deductions. After those, the couple would have $26,000 in taxable income that would be subject to two of the seven tax brackets. The first $18,550 would be taxed at a 10 percent rate, with everything above that taxed at 15 percent.

The combined effect of these two tax rates would produce an income tax of $2,983, according to Breitbart’s analysis. That’s an effective rate of around five percent of $55,000. But the family gets to apply two child tax credits against this amount, bringing its tax bill down to $983. You can see why this is such a popular tax credit.

Under the Trump administration’s proposal, the personal deductions go away but the standard deduction rises to $24,000. This gives the family an income of $31,000 that would be taxed at a single rate, 12 percent. This produces a tax liability of $3,720, an effective rate of around 7%.

If the child tax credit doubled to $2,000 per child, the family would have no tax bill at all. In fact, it would be eligible for a refund of $280. That would qualify to Trump tax plan as one of the biggest middle-class tax cuts ever.

If the tax credit remained unchanged, however, the couple would face a tax bill of $1,720. In other words, it would owe more in taxes after the overhauyl than before.

The tipping point for many middle-class families would be a child tax credit of $1400. At that level or above, a middle-class family of four earning $55,000 would get a tax cut. Below that, the family’s tax bill will most likely rise.

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